What the past few weeks have taught us about hotel loyalty programs

The past few weeks have been horrible on the hotel loyalty program front. I don’t mean just horrible when looking at it with a microscope, but rather horrible on a global, long-term scale. I’d say that the across the board devaluations we’ve seen with hotel loyalty programs are almost unprecedented. Admittedly some changes are worse than others, though to recap, here’s what we’ve seen in the past few weeks (in order of crappiness, in my opinion):

The only major program where we haven’t seen a devaluation lately is Hyatt. In December they announced their 2013 hotel category changes, whereby seven properties went up in price and 10 properties went down in price — a net positive for us!

As a result of these devaluations I’ve been getting the same questions over and over. The first one is why this is happening, and the second is whether or not it makes sense to be loyal to hotel programs anymore. So I figured I’d share my thoughts.

This isn’t a coincidence

I think it goes without saying all of these devaluations aren’t a coincidence. That’s not to say that they wouldn’t have all eventually happened, but we’re seeing a bit of a domino effect here, whereby one program started with a devaluation, the next one caught on, etc. For example, Hilton announced their devaluation on Tuesday, and on Wednesday morning Starwood published their 2013 category changes, which were overwhelmingly negative. It would have happened either way, but I’m sure the folks at Starwood were doing the happy dance and put the finishing touches on the category changes, since they knew any negative changes would be overshadowed by what Hilton did.

But while the Starwood and Priority Club changes could simply be considered a “yearly adjustment,” the changes we’re seeing with Hilton, Marriott, and Wyndham are a lot more than that. These aren’t reasonable year-to-year adjustments, but radical program changes. We’ve seen hotel rates and occupancy as high as they’ve been in years, and I’m sure that plays a large part in these devaluations.

What makes airlines and hotel loyalty programs different

While I won’t try to justify any of these program changes, I think it’s worth understanding why airline and hotel loyalty programs fundamentally differ.

In a vast majority of the cases, airlines own their loyalty programs, and while they’re viewed as a separate business for account purposes, they’re the same company. If you use MileagePlus miles to book the last first class seat on a United flight an hour before departure and that seat would have otherwise gone out empty, the cost of them releasing that award seat is whatever the marginal cost is, which is next to nothing. Admittedly it gets a bit more complicated when you’re redeeming for travel on partner airlines, since there is a compensation structure set up there, but keep in mind that the reimbursement is probably quite low, given that airlines typically release award seats on flights that they forecast will have empty seats.

Hotels are a different beast. For the most part the major chains simply have a management contract for a hotel and don’t actually own it. They’re getting paid a portion of revenue for slapping their name on the hotel and providing management services, marketing, and loyalty programs, but that’s the extent of it. There are of course exceptions, but most chains don’t own a majority of their hotels.

If you redeem points for a stay at a hotel, the loyalty program reimburses the hotel for it. If the hotel isn’t close to full then the reimbursement rate is very low. If the hotel is quite full, though (typically over 90%), the loyalty program reimburses the hotel at or close to the average daily rate. So let’s be clear about what that means. If you redeem 22,000 Hyatt Gold Passport points at the Park Hyatt Sydney and it’s 95% full, chances are that Gold Passport is paying the hotel somewhere around $800 for the night. That means you redeeming those points is costing Gold Passport about 3.6 cents per point, which is crazy expensive.

And unlike with airlines, hotel loyalty programs don’t have capacity controls on redemptions most of the time. As long as a standard room is available you can redeem points for it. Most programs introduced the “no blackout dates” policy during the recession, when hotel occupancy levels were quite low, meaning the loyalty programs where just reimbursing the hotels at a little bit over the marginal cost. Now that the hotel industry has largely recovered, I’m sure you can imagine how much money loyalty programs are forking over to high end hotels in peak season.

So hotel loyalty programs are in a unique situation. They have no control over how many free nights are redeemed, and even if a hotel room would have otherwise gone empty, they’re still paying the hotels huge amounts for those rooms. So to some degree these changes are a reflection of the costs incurred by the loyalty programs in reimbursing the hotels. What we’re seeing is low end redemptions get cheaper (whereby the loyalty program typically only has to reimburse the hotels at a little over the marginal cost), while high end redemptions are getting more expensive.

Why you shouldn’t give up on hotel loyalty programs, but should consider not being loyal

There’s some truth to the saying “if it sounds too good to be true it probably is.” I think Hilton is the perfect example. They have relationships with both American Express and Citi, and are clearly as interested in making money from selling points to credit card companies as they are in managing hotels.

This is a chain that gives you Gold status in their program (which gets you free internet and breakfast/club lounge access) just for having a credit card with a $95 annual fee, and gives you Diamond status for just $40,000 of spend on a credit card per year. At the same time they increase the requirements to earn status for those actually putting in the nights and stays required to earn status “the hard way.” For example, earning Gold status used to take 16 stays or 36 nights, and now instead takes 20 stays or 40 nights. So they’re basically saying they value someone that pays a $95 annual fee more than someone that spends 36 nights with them a year.

So what lesson can we take away from this? Loyalty is a two way street, so being loyal the “hard” way probably doesn’t make sense. That’s why I’m not totally leaving Hilton after this change. If I can use Gold status for a handful of stays a year when it’s convenient for $95 per year, that’s a steal. I pity the fool that actually spends 40 nights per year with them to get the same benefits (and I realize many of you outside the US don’t have the same opportunities, and I feel horrible for you!).

Most hotel credit cards come with an annual free night certificate. Keep the credit cards, don’t put any spend on them, utilize the annual free night at expensive properties that more than justify the annual fee, and call it a day.

But sleep around a bit. If you’re looking for a quick overnight or don’t care about elite benefits, use Priceline. If you want to be treated well with a hotel stay and want extra benefits, branch out and stay at a non-chain hotel and use American Express Fine Hotels & Resorts or Virtuoso.

Why these changes make me feel better about Hyatt

I’ve been giving Hyatt a hard time lately for their lack of interesting promotions and lack of innovation. Back in the day, before they had a co-branded credit card, they were by far the best when it comes to promotions. They’d consistently offer a “faster free nights” promotion, whereby you earned one free night at any hotel after two stays. Yes, two $70 stays at a Hyatt Place would earn one free night at the Park Hyatt Paris, for example. And while that was amazing in every way, it obviously wasn’t sustainable long term.

But despite giving them a hard time for their lack of promotions, I’ve also been vocal about saying that Gold Passport is also one of the few loyalty programs I trust. The VP of Gold Passport, Jeff Zidell, is one of the most honest people in the “loyalty program industry,” if there is such a thing. And I think it’s reflected in the execution of their program. I find that Gold Passport consistently under promises and over delivers when it comes to elite benefits.

More than anything else, though, I can appreciate that they’re trying to run a sustainable program, and balance their short term financial interests with the interests of those actually loyal to the program. So as much as I’d like to cry out and whine that their promotions aren’t very exciting at the moment, I can also appreciate that they’re not massively devaluing their award chart. It’s one of the few programs where I have faith that they won’t overnight increase the redemption costs to the point that you’re left dumbfounded.

Are airline programs next?

Complete speculation on my part, but if I were a betting man I’d speculate that 2014 will be a bad year for airline loyalty programs. Assuming the American and US Airways merger goes through, we’ll go from seeing six legacy carriers a few years ago, to three. The fewer carriers, the less of a need to be super-generous to frequent flyers, as travel will be driven more by which airline best serves your preferred market than elite benefits.

I assume later in the year we’ll see what the new “combined” loyalty program looks like for American and US Airways, and I’d be willing to bet that’ll come with a new award chart. Nothing outrageously horrible, I suspect, but as is the case with any merger (or at least with Delta/Northwest and United/Continental), they’ll take the worst from both programs, including the most expensive redemption rates from both programs when constructing their award chart, and I suspect we’ll see the competition match.

I’m always a fan of earning and burning rather than “saving” points, and I think the past few weeks has been a perfect reflection of why that’s a good strategy on the hotel front.

Comments

  1. What if hotels didn’t have last room availability and had to release space based on expected occupancy, much like an airline? Wouldn’t that solve the problem on the points administrator end. Obviously it would not be a change we would like much, but it seems silly to me that I can get a room on points at most hotels if I book early enough and a basic room is still availible, even on holiday weeks. As the programs stand now they have to plan for the worst case scenario.

  2. @ AdamH — Well, that would be one solution, but the problem is that the “no blackout dates” is a HUGE selling point for the credit cards. Many people are sick of airline credit cards due to all the “blackout dates” and lack of saver reward availability, so I think that’s a major selling point of hotel credit cards. While I doubt credit cards have direct control over the award charts, I’d be willing to bet they wouldn’t tolerate getting rid of blackout dates, as it’s in almost all their marketing materials.

  3. Taking into account your analysis (which I think is spot on) and adding the prospect of monetary inflation in the coming years, is the “points game” sustainable?

  4. @ JetAway — Big picture it definitely is sustainable, it’s just a function of staying on top of things. Let’s be clear about the bottom line here — these programs are MASSIVELY valuable for the airlines and hotels, and many of them wouldn’t be in business without them (take American, for example). In order to continue to profit off of them they have to provide enough value to people so that they consider them worth pursuing.

    So while we have seen devaluations, we’ve also seen so much more value in these programs and also credit cards lately, like massive sign-up bonuses, category bonuses, free nights annually just for keeping a card, etc.

    I do think it’s somewhat cyclical, just like the economy. We’ll see devaluations, followed by more benefits being added and points being easier to earn, followed by another devaluation, etc.

    Just my two cents…

  5. Excuse me but I’d consider Best Western Rewards to be a MAJOR hotel rewards program. They do have over 4,000 hotels around the world and if anything, they have NOT stooped to such stupid behavior as gutting their loyalty program.

  6. @ Food Wine and Miles — Absolutely not. I wouldn’t be surprised to see a revenue component to the loyalty program, like what Delta has, but I still think it’ll be mileage based. There’s a reason the major legacies love printing up currencies that they control and that have no direct cash value towards the cost of a ticket, and I see no reason they’d change that.

  7. I still feel so lucky that I only put less than 10K dollars on the Citi Hilton Reserve this year, as I commented on another blog. Just a few days ago, I decided to put 40K dollars on this card over next 3 months to get the Hilton Diamond status. Now I believe 10K is the most, which is a free weekend night certificate.

    Time to go back and put everyday spending on SPG and Sapphire Preferred again?

  8. @ Yi — Diamond can still be worth it if you’d make a dozen or so stays at Hiltons over the next year, though purely in terms of return on everyday spend in non-bonus categories I’d say that The SPG AmEx and CSP are the best bet.

  9. I’d never thought of it the way you described — hotels chains don’t actually own their properties and thus have different incentives regarding their loyalty programs. That’s a great insight. Thanks, Lucky.

  10. I hate that bloggers are making such a big deal about these changes. I for one have so many damn hotel points I can’t use them fast enough. Marriott points pile up quickly. If you don’t want to use them then don’t be loyal and don’t get the benefits.

  11. @ Morgan — Thanks!

    @ Matt — Wait a sec, so you are loyal but don’t care what they charge you for a free stay?

    @ Michael — Wow, thanks! Even better than the sweater story? šŸ˜€

  12. I’m one of those suckers based outside the US that doesn’t have access to the generous co-branded credit cards. I have nearly exhausted my HHonors points balance (only have around 4k left) and am moving to a best room of the day policy. If a Hilton property happens to be in the right location and offers a fair price then I’ll consider them.

  13. I for one stay at a hotel when I am on vacation. Priceline is one of the best tools to get a 4* property at a very convenient price. And most of the time I pretty much know which hotel I am going to get (plus it is a lot of fun to bid). Once I reach my destination I use the hotel for sleep purposes only. 4* will do just fine. I see no point to be loyal unless you travel for a living.

  14. @lucky, referring to your comment earlier about how miles are very lucrative for airlines – aren’t most redemptions domestic Y tickets?
    So if they gut levels (like Aeroplan) but keep the lowest level intact, only “we” are going to get affected. Why wouldn’t loyalty programs do that?

  15. @ Bill — Definitely soon, though I’d first like to see what happens to AXON awards before doing that, as it would impact my valuation of Hilton points.

  16. @ Alan — And it’s certainly a possibility, though I don’t think international premium cabin redemptions are that huge of a cost to them in the grand scheme of things. They’re heavily capacity controlled and very much a “carrot” for the frequent traveler.

    That being said I wouldn’t be surprised to see US airlines have similar redemption rates to Aeroplan for international premium cabins.

  17. @lucky I am loyal, to the highest tier on 2 programs and Gold on HH. It’s not that I don’t care what they charge, it’s that I don’t care what I pay… get the difference? Certainly there are exceptions to that, I’m not going to pay 16k SPG for the 4P Darling Harbour, but I will pay 30K SPG for a night in the Maldives. This comes back to my issue with MR’s… people pay as little money as possible then want the highest elite status and all the perks, while I spend more on fares, changes, etc and get the same benefits. At least with the hotel programs, I get rewarded for spending more (outside of COS bonus, which I do and don’t get sometimes). To me, my miles and points are a free perk of my job (I travel 50 weeks a year), so truthfully, as long as it’s not SO devalued that it’s impossible to redeem, I don’t even think twice. Different strokes for different folks certainly, but not the doom and gloom you guys are making it out to be.

  18. I would say that the almost simultaneous devaluations were a coincidence. I cannot imagine that these decisions were made without thorough evaluation, as opposed to copycat spontaneous decisions.

  19. So, I finally decided to see what the “devalued” program meant to the places I have been looking at staying at in the near future. All of them stay the same so adding in the free 5th night, the change actually increases the value of my points.

  20. @ Matt — I hear you, but at the same time for those of us not earning points and miles through travel, there’s a huge opportunity cost to earning them. For example, if you spend $40,000 on a credit card and have the choice between a 2% cashback card and the Citi Hilton Reserve, those points and Diamond status “cost” you at least $800. So I certainly don’t view points earned as free and do think it’s reasonable to expect a certain amount of value out of them. But I agree with you that things were too good to be true for those with credit cards, so we can’t be *that* mad.

    @ Gene — I’m not saying the devaluations were a coincidence, but rather the timing. I’m sure they all had plans to devalue their programs soon, but I don’t think it’s a coincidence that they were all done so close to one another.

  21. While it’s disappointing to see all this happening, especially for someone like me who can only afford (both in time and money) to take one big trip a year and thus tries to use points for aspirational properties, I don’t think anyone is entitled to a static rewards program. The cost of hotels in dollars goes up and down based on popularity and time of year, so why shouldn’t the cost in points too? If a program sees that they are allowing certain hotels to go for less than what they deem they are worth, they have every right to raise the price. If you don’t like it, stop using their credit cards and stop staying at their hotels. And for what it’s worth, I’m currently saving for a trip to Hawaii and the cost of the Grand Wailea Waldorf Astoria actually went down per night, from 272,000 points for 4 nights using the GLON to 280,000 points for 5 nights using 5th night free during an off-peak month. So it’s not like you can’t still find nice properties for a relatively decent price.

  22. I’m on board with your arguments except for one:
    “The fewer carriers, the less of a need to be super-generous to frequent flyers, as travel will be driven more by which airline best serves your preferred market than elite benefits.”
    It seems to me that when there were six major airlines, consumers would have picked one based on which served their market, given that the airlines had very different regional footprints. Now that there will be three consolidated airlines that each more or less cover the entire U.S., it seems like you can pick any airline for any market.

    All that said, with only three major airlines, if one decides to reduce benefits, only two others have to follow to create a new normal. It was a lot more likely when there were several airlines that at least one company would buck the trend and thus create a disincentive for the others to reduce benefits. Much easier now with only three majors to collude.

  23. I hope Club Carlson sees this as a time to stand fast on thier valuations and gain ground with thier program, rather than figuring they can devalue because everybody else is. I have 700K points and see this as a month at top properties (taking max advantage of the Club Carlson credit card “last award night free with 2 night stay” feature. I am hoping to be retired in the 2nd half of this year and plan some major trips.

  24. The root cause of these devaluations is the flood of points issued by banks for credit cards. As with any “currency,” if supply is increased, its underlying value decreases.

  25. I think you’re being too hard on Starwood. They didn’t add categories. The C&P thing was a pretty big value reduction but the category moves aren’t, they’re simply adjusting for increased room prices. Category moves aren’t a devaluation, but category add or point requirement changes are. Also, I’d say a good quarter of the Starwood hotels moving up a category are just Starwoods that were moved down last year. Several Denver properties come to mind along with some CA ones.

  26. @ David — I have to disagree with you, I think people are being way too easy on Starwood. In 2012 a net of 40+ hotels went up in category, while this a year a net of 150+ hotels went up in category. That’s hardly just shifting around the prices from those hotels that were dropped a category last year.

    Also, the C&P devaluation brings C&P redemptions very close to the breakeven cost between outright using points and doing C&P. C&P basically now lets you “buy” Starpoints at 1.8 cents each vs. an outright redemption, and while that’s a good deal, it’s now a better value to do the fifth night free with an outright redemption, in my opinion. It’s by no means a steal anymore.

    Add that to the fact that high end redemptions with Starwood are an absolute ripoff, and I think the program has lost quite a bit of value.

  27. Lucky, so will you still be going for Starwood Platinum status based on # of stays (20 if you have both SPG cards)? I was planning on staying mostly at Starwood this year to hit the Platinum status again, but with these changes I’m reconsidering what to do..

  28. The big difference for me between airline and hotel points is that at some point people hafta get on a plane, but there are a lot more choices when it comes to accommodation. For example, if airfare was egregious I could drive from NYC-MIA, but I can’t find an alternative to LHR. But once in London, I could stay at a hostel, B&B, couch surf, vrbo, non-chain hotels, hotwire/price line, or my favorite – with distant relatives šŸ™‚

  29. Higher occupancy rates may a be major factor in devaluations, but what would the occupancy rates be without the reward nights? Do we know how much of the occupancy rates are due to award nights? Could higher valuations lead to less award nights used, lower occuoancy rates, and falling cash rates?

  30. @ Andrei — Yep, still plan on going for Hyatt Diamond and Starwood Platinum. Qualify with Starwood based on nights (40) since I like the 10 suite night awards, and that’s not too tough to do when award nights count towards status.

  31. @ Carl P — That’s a great question, and I don’t think anyone knows (at least not anyone in a position to share). I wouldn’t be surprised if at times half of the guests in a hotel were on award nights (especially at the Park Hyatt Paris in summer, for example).

  32. @lucky If somebody is spending 40k on a single CC in a year, then they certainly have a) the means to make due with the “devaluation” in these programs & b) have the intelligence to know that you never get something for nothing.

  33. In Germany you can get Gold Status at HH for having a 48ā‚¬ a year CC. This is one of the few examples of such a thing outside of the US and it is actually cheaper than the US. Another thing you can do in Germany is “churn” newspaper subscriptions to get LH miles. There are regular offers for introductory subscriptions which make them churnable.

  34. “and I realize many of you outside the US donā€™t have the same opportunities, and I feel horrible for you!”
    thanks, at least you realize how difficult things are in Europe, especially if you are neither in the UK nor in Germany šŸ™‚

  35. This is why i love priority club,Royal ambassador status,no credit card bonus,no credit card spending can get you through it,you have to earn it the hard way.

  36. You can basically get Club Carlson Gold and Hilton diamond with the Amex ICC centurion cards plus a few other benefits for non-us based persons who cannot get any of the american credit cards.

  37. Thing about hotel points (my experience) is every time I redeem it, the hotel gets next to night for the stay.
    If the hotel is going to be over 95% capacity, chances are the availability for award is not going to be there, unless you booked way in advance.

    In fact most of the time I see the hotel only getting paid somewhere around 10 – 20%.

    Furthermore, I only redeem when points are much more value than revenue. So usually my experience is that the hotel actually loses out more on award stays, which is why some hotels like IC Melbourne won’t give upgrades on award stays to RAs.

    On the other hand, Accor hotels purchase points at 11 EUR per 1000 points.
    And at 2000 points for $60 USD voucher redemptions, it seems Accor loses out a bit on this one too. Not sure if hotels get the full value of vouchers though (but they certainly can make back a bit on the exchange rates).

    @ mohamed b,
    RA referrals can be purchased easily =)

  38. @Lucky Have to disagree with you here. *wood redemptions have always been insane in Cat 6 and Cat 7. There’s nothing new there and nothing unexpected. In short, you shouldn’t expect to stay in an overwater bungalow unless you want to pay through the nose, but you knew that when signing up for the program. Hilton, OTOH, pulled the rug out from under people who were expecting to be able to do it for far cheaper and were making their travel plans around the fact Bora Bora and the Maldives were reasonable redemptions.
    As for *wood, last year, ~140 hotels went down a category, so to have ~180 go up this year just cancels most of that out and then a little bit on top. Besides, I’ve found revenue rates have gone up over the last year by a decent amount, so it makes sense for the Categories to go up as well. Every year, one expects categories to change, what people don’t expect are entirely new categories or the doubling of points rates.

    Side question, the going valuation for *wood points is 2.2-2.5…does the C&P change bring your number down?

  39. Re @David’s comment that “Hilton pulled the rug out from under people…” I think that is spot on. And that’s why the initial furious reaction from bloggers was spot on, with reference to Hilton’s behavior.
    Yes, all is not lost and many of us will do fine or better in the new regime, but that doesn’t excuse Hilton’s sudden drastic devaluation of some properties. Whether people should’ve seen this coming or not, a change that drastic is really a bait and switch. So, yes, we will all be fine and many places are the same or better now, that’s no reason to let Hilton off the hook for abusing the trust of its hhonors and credit card holders.

  40. Give me a quality breakfast and free Internet, plus a few free nights here and there, and I’m a happy camper…..

    Which is why I’m still pumped about the Citi Reserve Hilton card.

  41. Lucky, I believe Hilton actually owns most of their hotels, making them unique among the brands. I am not certain if that makes this smarter or dumber, but they are losing me.

  42. Last year we stayed at the Trafalgar Hilton in London for 37,500 per night which was an absolute steal as the rate was almost 500 pounds per night including tax. That’s over 2.25 cents per point. I don’t know what the new rate is but even if it doubles it’s still over well over one cent per point which is great for Hilton points which most bloggers seem to value at about .7 cents per point.

  43. See my post above, but as a Hilton Gold I also receieved free Wifi and breakfast for two which are very valuable in London ( worth at least $30 per day.

  44. Good post! I’m still curious to finally learn a number what airlines pay each other for redemptions (my suspicion it’s nothing!). So the incentive for hotel loyalty programs to devalue is higher give the high occupancy but it’s also kept in check by the appeal of a loyalty program. If it loses dramatically the brand loses as well and hotels will switch brands over time and reflag.

    I think another big trigger is how many property applications Marriott and Hilton have gotten in the last 12 months. Seemingly enough so they feel devaluing the loyalty program will not impede the franchise fees (their real revenue). Hyatt and Starwood may not have teh same number of properties coming to them so they keep on providing value for us.

  45. @ David — Yes, 140 went down last year, but 180 went up last year. That’s a net increase at 40 hotels. And this year it’s a net increase at over 150 hotels. So that’s about 200 hotels that have gone up in price over the past year.

  46. @ Bundy — Can’t say I’ve ever used either, but there’s no doubt in my mind they’re proving to be competition to hotels, and over time I think we’ll only see that trend continue as rates go up and loyalty programs continue to decrease in value.

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